For the second month in a row, the Indian equity market has risen by more than 5%. It happened in October, and again in November. At the same time, there has been a lot of uproar about India’s soaring valuation. When compared to historical trends, India does indeed have a very rich valuation. And why not?
India commands such a high valuation for the simple reason that it is one of the world’s fastest-growing economies. Investors are constantly on the lookout to invest in an economy that displays potential growth. For instance, in November, FIIs invested Rs. 36000 crores. If they were worried about the valuation, they would not have put in as much money. Similarly, FIIs have invested nearly Rs. 90,000 crores in the Indian equity market since July 2022.
We do not believe that the Indian equity market is overvalued; on the other hand, we believe it is justified. Only in India have listed companies’ net profits more than doubled since pre-covid levels. Despite the Russia-Ukraine crisis, higher interest rates, and inflation, India Inc.’s profitability has increased by 10% in the first half of 2023 versus the first half of 2022.
Notwithstanding global challenges, the Indian economy has demonstrated remarkable resilience. And as these challenges fade, headwinds will turn into tailwinds as we move forward.
From historical precedence, an emerging market like India would have one of the worst-performing indices in the world. However, this is the first time that despite a worldwide crisis, the Indian equity market has outperformed the Dow and Nasdaq.
What do we think will happen next? There is a significant tax buoyancy in both indirect and direct taxes, which will allow the Indian government to spend on CAPEX, further boosting economic growth.
In the global context, India would be one of the world’s fastest-growing economies. With crude prices falling, it will relieve the pressure on the rupee and reduce inflation.
Lower inflation, a stronger rupee, and no interest rate hikes from the RBI may be the way forward, as the RBI will eventually take notice of falling inflation. As a result, it’s a promising platform for equity to thrive. Another plus is the maturity level among Indian equity investors. Because of their emotional investing stability, they will continue to invest in the Indian equity market irrespective of market volatility.
With increased FII inflows, growing retail investors, good earnings growth, and tailwinds coming in, we believe the Indian equity market will perform exceptionally well. Based on these factors, we anticipate the Nifty to be at 22200 by December 2023.
Sectors to Watch
Because the government will spend a lot of money on CAPEX, the capital goods sector should do well. We also believe IT would perform admirably. Indian IT firms have been able to weather the predicted doom and gloom caused by events in Europe and the United States. With the rising attrition rate either peaking or about to peak, there is a lot of hope that the IT sector will thrive. And if for some reason, the government of India reduces or gives some benefit to the direct tax front, even the consumption basket should do very well.
Overall, we believe that Indian market is poised for a big rally. We also believe that mid and small caps will bounce back strongly.
(The author is Chief Investment Officer, MarketsMojo)
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